The U.S. dollar fell broadly on Tuesday as U.S. lawmakers remained deadlocked over raising the nation's debt ceiling to avoid a devastating default, while U.S. and European shares also declined.
Unless lawmakers reach a deal to raise the $14.3 trln ceiling by August 2, the United States faces the prospect of a default on some of its $9.6 trln bonds outstanding.
President Barack Obama, in a televised address Monday night, warned that this would be a "reckless and irresponsible outcome," but he gave no indication that a compromise was imminent.
Weakness in the greenback helped buoy crude oil prices, while gold hovered near a record high above $1,600 an ounce as investors looked to the precious metal for safety.
The U.S. currency hit a record low against the Swiss franc of 0.7997 franc on trading platform EBS and fell to a four-month low near 77.883 yen , approaching a record low of 76.25 set in March.
"The market is getting more nervous about the debt ceiling issue," said You-Na Park, currency strategist at Commerzbank in Frankfurt. "If the market was really starting to price in the possibility of a default, the dollar would be losing more than what we saw."
Against a basket of currencies, the dollar fell 0.8%. The euro rose 1% to $1.4517 . Investors fear a potential debt default and a downgrade of the U.S. credit rating would tarnish the dollar's status as a global reserve currency.
The debt gridlock in Washington also hit U.S. stocks with the Dow, the biggest loser, suffering additional pressure from investor disappointment over quarterly earnings from 3M .
The Dow Jones industrial average was down 51.85 points, or 0.41%, at 12,540.95. The Standard & Poor's 500 Index was down 1.46 points, or 0.11%, at 1,335.97. The Nasdaq Composite Index was up 3.88 points, or 0.14%, at 2,846.68.
"We've been seeing volume start to dry up as traders are seeing less positions," said King Lip, chief investment officer at Baker Avenue Asset Management in San Francisco.
"No one wants to be short and no one wants to be long," Lip said. "If there is a resolution, shorts will lose money; if there is no resolution, bulls will lose money. Investors are just kind of sitting on the sidelines."
European stocks closed down 0.3% at 1,100.97 points, dragged lower by UBS after the Swiss bank reported weaker-than-expected second-quarter profits.
World stocks as measured by MSCI world equity index rose 0.4%, while emerging stocks gained 0.9%.
Investors so far appear to have done little to prepare for a default or a cut in the U.S. triple-A credit rating. Many are still clinging to the hope that lawmakers will eventually reach a deal. It is also nearly impossible to insure against what is considered a low-probability event, especially given the lack of alternatives and the depth of the market, analysts said.
The cost of insuring the United States against default stood around 59 basis points , nearly half the March 2009 peak.
The credit default swap curve is nearly flat with one-year CDS at 59.4 basis points. This in itself reflects investor jitters, but it is not the kind of pricing normally seen when investors expect an imminent default.
TREASURY AUCTION
Fears the government will run out of cash by August 2 if lawmakers do not reach agreement fueled anxiety about appetite for this week's $99 bln of new debt supply.
Those fears remained even though the sale of $35 bln of two-year notes on Tuesday was met with relatively solid demand.
Still, Treasuries prices rose in recent trading, as a decline in the U.S. stock market renewed a safe-haven bid. The benchmark 10-year note last traded up 13/32 in price for a yield of 2.95%.
"We have a lot of uncertainties with these auctions with what's happening in Washington. People are hesitant to take on risk," said Thomas Roth, executive director in U.S. government bond trading at Mitsubishi UFJ Securities USA in New York.
Safe-haven Bund future settled 8 ticks higher at 128.34 as buyers demanded a high yield in debt auctions by Spain and Italy, underscoring persistent concern about euro zone peripheral countries despite a second bailout package for Greece last week.
In the commodities market, U.S. crude recouped early losses to trade at $99.68 a barrel, up 0.5% on the day. Spot gold last traded around $1,617 an ounce, after hitting a record $1,622.49 on Monday.
